[co-author: Dianne Bell]

A consultation that will remain open until 11 April 2023 offers further clarity on the proposals to regulate buy-now-pay-later products.

On 14 February 2023, HM Treasury published its consultation and accompanying draft legislation on the regulation of buy-now-pay-later (BNPL) lending. The consultation follows the proposals in HM Treasury’s prior publications released in October 2021 and June 2022, since the government announced its intention to bring currently unregulated BNPL products within scope of the regulatory perimeter. This latest consultation provides some welcome clarity on the approach to this upcoming sea change for firms operating in the BNPL space.

The key changes will be effected by amending the current fixed-sum interest-free credit exemption in Article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). BNPL lending usually falls within this exemption as such agreements meet the conditions as interest-free loans repayable in under 12 months and in 12 or fewer instalments. Article 60F(3), which provides an exemption for running-account credit, will remain unchanged.

Scope of BNPL Regulation — Third-Party Lenders Only

The government announced in the February consultation that it has altered its stance on the scope of the regime and will only seek to capture BNPL agreements where a third party lender is involved, rather than also regulating short-term loans provided directly by merchants online or at a distance (e.g., over the phone) as had previously been proposed. This development reflects the government’s aim to ensure that lending which presents a substantive risk of consumer detriment is prioritised in its proportionate approach to the regulation of BNPL lending.

This will be welcome news for merchants wishing to continue offering this type of credit themselves without the need to apply for an FCA licence. The consultation also reconfirms that merchants will be exempt from FCA regulation as credit brokers if they offer BNPL agreements with a third-party lender as a payment option. However, due to higher risk of pressure-selling, merchants whose representatives are actually present in a customer’s home when they sell goods or services will be subject to FCA authorisation.

The upshot of this approach is that fixed-sum BNPL agreements will be regulated if the loan is:

• interest-free and repayable in 12 or fewer instalments within 12 months or less;
• provided by a person who is not the provider of goods or services which the credit agreement finances (i.e., third-party lenders, who will need to be authorised and regulated by the FCA); and
• not exempt as a result of falling within one of the new applicable exemptions (see further on this below).

The draft legislation also provides for an anti-avoidance mechanism to prevent merchants pre-agreeing to sell goods or services to a lender, such that at the point the consumer enters into their credit agreement, the lender owns the goods and thus is not a “third-party” in the transaction.

Exemptions

In keeping with its intention to regulate BNPL lending in a proportionate way, the government is proposing a number of exemptions that will apply to agreements if a third-party lender is involved, in addition to other existing exemptions which will continue to apply (e.g., business lending). These exemptions relate to:

• agreements financing premiums for insurance contracts;
• agreements offered by registered social landlords to tenants and leaseholders to finance the provision of goods and services, e.g., supporting the purchase of white goods; and
• loans made by employers to employees (either directly or via a specialist company offering employee benefits) repaid by monthly salary deductions, e.g., for the financing of season tickets or tenancy deposits.

These specific exemptions reflect the government’s wish to continue to support access to more affordable credit options (particularly for consumers with lower incomes) where appropriate, in circumstances in which the risk of potential consumer detriment is low.

Approach and Transition to a New Regulatory Regime for BNPL

The consultation also reconfirms and in some cases clarifies the approach to regulatory controls for BNPL lending coming out of HM Treasury’s earlier publications. Key aspects include the following:

• Amending the financial promotions regime so that promotions provided by unauthorised merchants offering BNPL agreements through authorised third-party lenders must be approved by an authorised person.
• Disapplying the pre-contractual disclosure requirements under the Consumer Credit Act 1974 (CCA) that would otherwise apply to BNPL agreements once they become regulated, and instead implementing FCA rules covering this area to allow for more flexibility and proportionality (to be consulted on separately). It is worth noting that the government recognises mainstream lenders may wish to comply with the new FCA rules for BNPL agreements by utilising the same pre-contractual disclosure format as they would for their existing regulated lending (assuming this is presented in a manner that is clear, fair, and not misleading and complies with the FCA’s new rules).
• Excluding newly regulated BNPL agreements from the existing small agreements provisions in the CCA, such that BNPL agreements of any value, including those not exceeding £50, will be subject to the full suite of CCA requirements.
• Tailoring the current FCA rules on affordability to ensure a proportionate approach to creditworthiness assessments for regulated BNPL agreements.
• Applying the current form and content requirements for agreements prescribed by secondary legislation under the CCA to ensure an appropriate degree of friction in the transaction – although the government is still keen to hear views on whether stakeholders deem this proportionate and so there may still be hope for a lighter touch approach.
• Retaining current trigger points for post-contractual information for customers in arrears or default – however there may be more to come on this as part of the wider upcoming CCA reforms expected in this area.
• Retaining Section 75 CCA on lender liability under a debtor-creditor-supplier arrangements in its current form.
• Giving consumers access to the Financial Ombudsman Service (FOS) in relation to regulated BNPL agreements and issues concerning the conduct of lenders.

Firms will be afforded time to familiarise themselves with the new requirements once the regime is finalised through the creation of a temporary permissions regime (TPR), allowing firms to continue to operate until they have successfully completed the FCA authorisation process. Further detail on how the TPR will work in practice is expected in the FCA’s consultation on its rules.

Timing

The February consultation closes on 11 April 2023, after which the government will consider stakeholder responses. A separate FCA consultation on proposed FCA rules for newly regulated BNPL agreements is expected to be published shortly after the government’s response to the consultation.

The government hopes to lay final legislation before Parliament later this year. However, given the numerous other reforms tabled under the Edinburgh Reforms, a delay would not be surprising (see Latham’s recent blog for a timetable of the key changes). Some alignment with the broader CCA reforms mentioned above is expected, and the government has also flagged that further interventions to prevent potential consumer detriment will be considered if necessary given the fast-developing and innovative nature of this market.